Search


Subscribe to AFM


Subscribe to AllFinancialMatters
by Email

All Financial Matters

Promote Your Page Too

The American's Creed

Site Sponsors

Books I Recommend


AFM in the Media


Money Magazine May 2008

Real Simple March 2008

Blogroll (Daily Reads)

« | Main | »

Where Do You Rank as a Taxpayer?

By JLP | November 10, 2010

Kiplinger’s posted an interesting article ranking taxpayers according to their 2008 AGI. The graphic they show isn’t clear so I’m assuming that their numbers are for the married filing jointly status. Here is a cut out of that graphic:

Just to see where we stood, I dug out our 2008 income tax return. According to our numbers, we rank in the top 10%. Although I feel blessed to be where we are, I’m discouraged because we don’t feel “rich.”

The article mentioned that the top one percent of taxpayers made 20% of the income of the U.S., while the bottom fifty percent of taxpayers only made 12.75% of the nation’s income. The article compares those numbers to 1986:

For historical perspective, back in 1986, the top 1% of earners reported 11% of all income and paid 26% of the income taxes; the lower-earning 50% made 17% of the income and paid 6% of the nation’s individual income tax bill.

Let’s think for a minute why those numbers could have changed (a little “what-if” thinking here)…

• People (Baby Boomers) are retiring and are therefore making less money than in the past.

• Lower income means lower income taxes.

• Tax rates dropped across the board. Those in the lower income tax bracket dropped 67% (from 15% to 10%). The tax brakets at the upper end dropped, but not as much based on percent.

• The U.S. has moved from manufacturing jobs to service jobs, where pay may not be as high. A lot of those manufacturing jobs were high-paying union jobs.

• White collar/management positions have continued to pay well due to supply and demand (and some might say corporate greed). Consider the field of engineering.

• The U.S. has adopted policies that have given more and more to those in the lower income classes in the form of income tax credits. I read somewhere (and even posted about it once) that something like 47% of Americans don’t even pay income taxes.

I think if we want to reverse the gap trend, then we need to help people get higher-paying jobs, rather than drag down those who have higher-payiing jobs. In other words, we get nowhere in the longrun by wealth redistribution. Real wealth comes from building and creating things.

I know this post is probably going to garner some comments. Some of you will agree with me while others of you won’t. I’m looking forward to a great discussion (without name-calling or other rude behavior).

Topics: Economics, Taxes | 35 Comments »


35 Responses to “Where Do You Rank as a Taxpayer?”

  1. BG Says:
    November 10th, 2010 at 12:42 pm

    Another article that ignores the Payroll tax (Social Security) to make it seem like the ‘rich’ are unduly burdened with taxes. Not faulting you JLP, but Kiplingers.

  2. Ron Says:
    November 10th, 2010 at 12:43 pm

    Does anyone other than me find it interesting that Google of all companies, announced a 10% payroll increase ACROSS THE BOARD to all employees? This same company supports politicians who would never do anything similar for the American taxpayer. It wasn’t a “progressive” payroll increase — janitors, programmers, and multi-millionaire managers got the same percentage increase.

    We certainly do need to get more people earning more, but we need to allow them to keep it. It does no good to earn more if Congress takes half your increase in taxes and devalues the rest.

  3. JLP Says:
    November 10th, 2010 at 12:48 pm

    BG,

    Let’s not go down the social security road…lol.

    For what it’s worth, I did not get the impression that Kiplinger was feeling sorry for the rich.

  4. Stacey Says:
    November 10th, 2010 at 1:00 pm

    AGI is before itemized deductions and personal exemptions. It would have been just as interesting to see a chart using Taxable Income figures…

    For that year only, due to an alignment of the planets that will never happen again, we scratched the top bracket. Mind you, we also paid $95,500 in federal income tax, thanks to amt and my self-employment taxes. We are now on the next rung where I hope we’ll stay…any higher up and it’s not worth what you give up in family life and the increased taxes. I suspect it will only get worse.

    I feel so exposed now. It’s like “boxers or briefs,” “panties or g-string?” :)

  5. BG Says:
    November 10th, 2010 at 1:07 pm

    Holy smokes Stacey! Great job.

    JLP) from the article:

    “Compared with that 38% of taxes paid by the top 1% of earners, the bottom 50% pay just 2.7% of the taxes collected.”

    I hate statistics like that. They pick a tax (income) that is predominantly paid by the wealthy, and yet don’t also represent the SS-tax: that is predominantly paid by the “not wealthy”.

  6. JLP Says:
    November 10th, 2010 at 1:11 pm

    BG,

    The article does mention that some lower income people pay more into social security than they paid in taxes.

    Do you also hate the stat that says the top 1% earn 20% of taxpayer income?

  7. BG Says:
    November 10th, 2010 at 1:22 pm

    No, I don’t hate that statement — fine by me. I’m glad people are free to make as much as they can. As you know, I want the _effective_ tax rates to be about the same across all income levels. And I think we are close to that today (except for the very bottom and very top income levels) when accounting for ALL the federal taxes (not just the income-tax in isolation).

    A bleeding heart could convince me that the poorest should have a lower effective rate — but nobody is ever going to convince me that the very top should have a lower effective rate than me.

  8. Stacey Says:
    November 10th, 2010 at 1:28 pm

    Why are the times off on our responses? Who didn’t set their clock back?!!

    BG, as I stated, it was a one-time deal. DH got a nice bonus when his former company got sold. He earned every penny and should have gotten more. But that’s a story for another day!

  9. Kirk Kinder Says:
    November 10th, 2010 at 1:32 pm

    Using social security taxes in the equation is misleading. Social Security benefits are based on income and SS taxes paid so we can’t say SS is regressive. People get this back (in theory). It is more like a mandatory retirement plan contribution where the return is paltry (and may be even worse when the shortfall really hits).

    I have two reasons why going after the rich is a bad idea. One, our nation is built upon equality. Those who want to tax the rich more want social equality, just not economic equality. To truly be equal and free, we need equality on both aspects. Create a flat tax rate for the sake of equality. Second, the folks in the wealthier brackets tend to save the money that would otherwise go to taxes. These savings are what funds new companies, new industries, and new technologies. Savings and investment is what creates sound economies, not government spending. There is nothing more unproductive than government spending. Does this investment improve the investor’s wealth? Yes. But, it helps all of us in the long run since it will be more effective than government spending.

  10. BG Says:
    November 10th, 2010 at 2:35 pm

    Kirk) I agree, something needs to be done. Either eliminate SS completely (and give me my 12.4% back in my paycheck and I’ll buy my own insurance), or give me a freaking Supreme Court enforceable contract so I don’t have to worry about having the benefits killed.

    As it stands now, I’m paying a 12.4% SS-tax for 30-40 years (which the linked article excludes), to see nothing in the end because a 2011 Republican House (or other future congress) wants to “reduce benefits” (without reducing the SS-tax mind you) — while at the same time, the same congressman want to make the ‘bush (income & dividend) tax cuts’ permanent; which predominantly helps the rich only.

    The rich-poor gap that JLP mentioned is only going to get worse with these planned changes.

    I’m all for a total replacement of all federal taxes (income, dividend, capital gain, corporate, SS, medicare, etc, etc) with a single flat tax on anything that can conceivable be considered “income”. No more exemptions, deductions, exclusions, and redefining of the word “income” either.

    Then we can start competing.

  11. Jon Says:
    November 10th, 2010 at 3:11 pm

    In 2008 I would be in the top 25%. I didn’t realize I was so high. But when I was making that money I did feel rich. Both my wife and I are fairly frugal and don’t feel we need much so maybe that’s why. Now I would be in the bottom 50% as I get my business going I’m not making anything! Hopefully my savings will out last the monetary devaluation.

    Kirk Kinder – #9,

    SS is bad for just the reason you state. Poor people are more likely to not get their money back since they are more likely to die younger and not enjoy the benefits for as long, if at all. Also, there’s no guarantee of the money (per the Supreme Court). Neither are policemen responsible for your safety (per court cases). Socialism sucks. Although I’m not against policemen neither do I think we should give them a monopoly on the security of the people (the people, i.e., us, need to keep ourselves, granted this ability is taken away more and more every year as government becomes more constrictive at the local, state, and federal levels).

  12. hal p Says:
    November 10th, 2010 at 4:26 pm

    that sends charitable giving right out the window

  13. Russ Says:
    November 10th, 2010 at 4:30 pm

    My HH income is in the top 1%. While I certainly won’t pretend to be poor, I do resent being called rich. There is a big difference between my lifestyle and Jay Z’s.

    Living in a big city, we certainly don’t feel rich when a modest house runs $400-$500k easily and that isn’t in the prime areas which would be closer to $1 million. We ride public transportation to work and drive old cars.

    The reality is we make just enough to where we can reasonably save for our retirement so we aren’t dependent upon social security. We can spend a little here and there, but certainly not living the life of the rich and famous.

    Tax increases, even modest ones do affect my spending habits. We cut back on eating out. We take fewer weekend trips. We postpone buying a new car. All the excess income that the “haters” think we have goes to max out 401ks, cash savings, and other retirement accounts.

  14. Jon Says:
    November 10th, 2010 at 4:45 pm

    I guess feeling rich depends on which way you look, up or down. We continued living like college students after I graduated and started work as an engineer. Since we lived among those who were bringing in 2/3 to 1/2 as much as us it made us feel rich. Of course, if we had been living around my coworkers I would have felt the penny pinching (since we would have been buying a house instead of paying $500/month rent) and probably not felt as rich. All perspective and life circumstances I suppose.

  15. Kirsch Says:
    November 10th, 2010 at 5:40 pm

    Two-thirds of American wage-earners pay more in PayRoll taxes than Income taxes !

    One can NOT casually dismiss that if the question is:
    “Where Do You Rank as a Taxpayer ?”

    Yes, Social Security complicates the discussion for some people. Payroll taxes also include Medicare, Disability Insurance and Unemployment Insurance.

    The U.S. Supreme Court has clearly stated that Social Security/FICA is legally a tax on income… not some whimsical insurance contribution.

    Payroll & Income taxes are exactly the same thing to taxpayers paying that government levy.

  16. Dan Says:
    November 10th, 2010 at 6:12 pm

    I’m the bottom 50% but I’m a grad student so financial sacrifice is the norm. I’ll earn more once I’m done with my degree.

    If the 47% figure on no income tax is correct that’s roughly commensurate with the $33k/yr listed above. While I do pay income taxes (single, no dependents), I can assure you that increases in my effective rate would begin to compromise my ability to live at first world standards, even with my exceptionally frugal lifestyle.

  17. Jack Says:
    November 10th, 2010 at 10:01 pm

    ‘I’m all for a total replacement of all federal taxes (income, dividend, capital gain, corporate, SS, medicare, etc, etc) with a single flat tax on anything that can conceivable be considered “income”. No more exemptions, deductions, exclusions, and redefining of the word “income” either.’

    That would, you know, reduce the burden on the wealthy and increase it on the poor. As you can see, the lowest quintile pays 5.8% in total federal tax, while the top quintile pays 27.1%.

    Wouldn’t a sales tax be a lot simpler to implement? No need to deal with all the reporting, income hiding, etc.
    http://www.cbo.gov/doc.cfm?index=5746&type=0&sequence=1

  18. Jon Says:
    November 10th, 2010 at 11:46 pm

    “Wouldn’t a sales tax be a lot simpler to implement?”

    Let’s get to the real goal. No taxes. If we must have taxes let them be tariffs and no more like the old days. The government doesn’t need so much money.

  19. John Says:
    November 11th, 2010 at 8:59 am

    JLP

    You said” We need to get people higher paying jobs, rather than drag down those with higher paying jobs”. Isn’t that what unions do? Negotiate wages and benefits for workers with their employers to increase their income? People have no problems with lobbyists and trade associations representing their members before Congress to get favorable treatment, but unions are considered evil because they help workers improve their compensation.

    John

  20. BG Says:
    November 11th, 2010 at 9:28 am

    Jack) That is pretty odd, seeing as every dollar is taxed minimally at 12.4% for social security alone (absolutely no exemptions on income under $106k except for HSA accounts). So how anyone could ever claim that someone has an effective rate of 5.8% is beyond me.

    Oh, I see now: they are claiming that the ultra-poor’s “food-stamps, Medicaid, housing and energy assistance” are counted as the poor’s income to inflate their numbers.

    What a crock.

    Why don’t they count the WallStreet bailouts as “income” for the ultra-rich? How about the government subsidies to the corn farmers, and the rest of the ‘entitlements’ that they get? There are plenty of programs that are directed at the ultra-rich, just like there are plenty for the ultra-poor.

    BTW: The “Deficit Commission” just recommended a 10% across the board cut of federal employees. Now we are getting somewhere.

  21. Jack Says:
    November 11th, 2010 at 10:10 am

    I am sure that if you were to cut those programs, the poor would consider it an income cut.

    I do not know whether farm subsidies got in there, but since only 1% of the population now works in that industry, I don’t think it would be much of a factor.

    As for the “ultra-rich” (and everyone with a 401(k) or any other stock holdings), yes, bailouts would be factored in as income when it comes through in realized capital gains and dividends.

  22. Courtney Says:
    November 11th, 2010 at 10:12 am

    We were top 25% in 2008 (I was finishing grad school that year) and will be well into the top 10% this year.

    I’m not getting into the argument other than to say that, given the threshold for the bottom 50% wasn’t even twice the poverty level for a 3-person household that year, I’ll happily pay my income taxes in the top 50%.

  23. Jack Says:
    November 11th, 2010 at 10:24 am

    John, I don’t have problems with lobbyists, because we have a right to petition the government. What I have a problem with is the things the government is handing money out — in general, Congress is not allowed to do the things that they are doing in that regard. If Congress only did what the Constitution said it could do, we would have far fewer lobbyists.

    As for unions, they were very necessary years ago. In some cases, they are still necessary. ATC comes immediately to mind, because it requires significant, non-portable training, and there is one and only one market for that labor. For the most part, labor unions got the things they were established to get — work-place safety, reasonable hours, etc. Thereafter, the unions needed to justify their continued existence, and their continued dues collection. So they went into the business of pay and benefits negotiation, and kept demanding more and more and more with every contract renewal. They succeeded in pricing their members right out of work.

  24. BG Says:
    November 11th, 2010 at 10:36 am

    Jack) Yeah, those ‘poor’ farmers really need a helping hand:

    http://farm.ewg.org/top_recips.php?fips=00000&progcode=total&regionname=theUnitedStates

    I’m really glad we did the wall-street bailouts, because my 401k would really look bad if those Goldman Sachs employees didn’t get their average bonus of $500,000 each — thanks to the US tax-payer bailing them out.

  25. Jack Says:
    November 11th, 2010 at 6:13 pm

    I never said anything about “poor” farmers, BG, except that, being such a small part of the population, I do not think that the inclusion or exclusion of farm subsidies would affect the numbers much.

    I’m all for ending farm subsidies, if you must know. I don’t approve of the Wall Street bailouts, either.

  26. BG Says:
    November 11th, 2010 at 7:22 pm

    Jack) But it would affect the numbers dramatically if you included the farm-subsidies and all the OTHER spending programs that people get a check for from the Federal Government.

    The 2010 federal spending of $3.5 trillion is going somewhere: someone is cashing those checks — and I can bet you it isn’t the bottom quintile that is the main beneficiary of all that lavish spending.

  27. Jack Says:
    November 11th, 2010 at 8:43 pm

    Read the report, BG. Those things WERE included in income.

  28. BG Says:
    November 12th, 2010 at 8:30 am

    So says the one who cannot provide a quote…

  29. Jack Says:
    November 12th, 2010 at 9:07 am

    Are you incapable of reading a simple report, BG?
    “Pretax cash income includes wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits.”

    Happy now?

  30. BG Says:
    November 12th, 2010 at 2:25 pm

    So, what part of that says “Farm Subsidy” payments?

    Thought, so.

  31. Jack Says:
    November 12th, 2010 at 5:37 pm

    The “Cash Transfer Payments” part.

  32. BG Says:
    November 12th, 2010 at 8:10 pm

    Good point. Well, if anything, your article points out that since 2001: since the Bush dividend & income tax cuts were passed — the net changes have been:

    Taxes have gone up for everyone in the bottom 90%. If you are in the top 10%, your taxes have gone down.

    The CBO article lumps people like Warren Buffett in with the top 1%, even though he is orders of magnitudes away from the top 1%’s average.

    Warren Buffett’s effective tax rate is 17.7% (as stated by him in the WSJ) yet he is included in the CBO article with the top 1%’s average of 31.2%. If he is that far below his groups average, then that means there are people who earn vastly less than he does who are paying 44.7%.

    And it is _that_ difference that I have a problem with. Warren, himself, has said that he pays a vastly lower effective tax rate than his own secretary.

  33. Jack Says:
    November 12th, 2010 at 9:57 pm

    “Taxes have gone up for everyone in the bottom 90%. If you are in the top 10%, your taxes have gone down.”

    You make that sound like a bad thing, but earlier, you wrote that you were for “a single flat tax.” The Bush era at least got closer to that in effect.

    As for Buffett, he does not contribute to the fund that is set up to pay down the debt, so he won’t put his money where his mouth is.

  34. Jack Says:
    November 12th, 2010 at 10:40 pm

    BTW, the “Cash Transfer Payments,” Food Stamps, Medicare, Medicade, AFDC, etc., should NOT be counted as income, but as NEGATIVE TAXES.

    Looked at that way, the bottom THREE quintiles are, on average, net recipients of federal largess. In other words, they receive more in payments than they pay in taxes:
    http://www.taxfoundation.org/files/sr151.pdf

  35. Jack Says:
    November 13th, 2010 at 5:40 pm

    I’d like to get back to your article. You wrote, “I think if we want to reverse the gap trend….” By which you meant the earning gap wherein the top 1% now makes 20% of the income, versus 11% in 1986.

    The problem with that is that there is a positive correlation between the income gap and the median income in the G20 nations. Increased productivity increases the general standard of living. Those most responsible for that increased productivity are the capitalists who invest their capital to make those improvements.

    If a farm-owner buys a tractor to replace the horse and plow, should the plowman be paid more for the improved productivity? No. The owner will reap that benefit. The plowman will benefit from better working conditions and lower food costs, despite the larger income gap.

Comments